Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether, in a scenario involving the U.S. expatriation rules, funds withdrawn from an IRA and transferred to a RRSP would be deductible under paragraph 60(j).
Reasons: Neither the deemed distribution, nor the withdrawal, is an “eligible amount” within the meaning of section 60.01.
October 29, 2018
Re: Transfer from an IRA to a RRSP
We are writing in response to your email dated March 10, 2018. You have requested our views on whether, in the context of the hypothetical scenario outlined below, the amount withdrawn by a taxpayer (the “Taxpayer”) from their individual retirement account in the United States (the “U.S.”) and transferred to a registered retirement savings plan (“RRSP”) would be deductible under paragraph 60(j) of the Income Tax Act (“Act”).
You presented a hypothetical situation in which the Taxpayer, a Canadian citizen, was living and working in the U.S. for more than 8 of the 15 calendar years preceding their return to Canada. You indicated that the Taxpayer was not a U.S. citizen but was considered a U.S. long term resident under the U.S. expatriation rules set out in section 877A of the Internal Revenue Code (the “Code”). The Taxpayer has returned to Canada, became a Canadian tax resident at that time, and relinquished their U.S. permanent residence status (the “green card”) under the U.S. immigration law after becoming a Canadian tax resident.
The Taxpayer had an individual retirement account (“IRA”) as defined in subsection 408(a), (b), or (h) of the Code. The IRA was a “foreign retirement arrangement” (“FRA”) as defined in subsection 248(1) of the Act and section 6803 of the Income Tax Regulations.
You have further advised that the Taxpayer was considered a “covered expatriate” for the purposes of the Code at the time he/she voluntarily relinquished the green card. We understand that, as a covered expatriate, the Taxpayer was treated as receiving a distribution of their entire interest in the IRA (the “Deemed Distribution”) for U.S. tax purposes on the day before the expatriation date under the expatriation rules in section 877A of the Code that apply to “specified tax deferred accounts”, which include an IRA; and that the Taxpayer was subject to U.S. tax on the Deemed Distribution. You have advised that, for the purposes of the Code, the “expatriation date” in this case was the date the Taxpayer relinquished the green card.
In respect of amounts subsequently withdrawn from the IRA, you have indicated that the Code provides that appropriate adjustments must be made to subsequent distributions from the IRA to take into account the amount previously taxed under section 877A of the Code. You have advised us that, for the purposes of the Code, the Deemed Distribution is treated as an “investment in the contract” and the return of this investment after the expatriation date is not included in gross income for U.S. income tax purposes.
After relinquishing the green card, and in the same taxation year for Canadian tax purposes in which the Deemed Distribution occurred (the “Taxation Year”), the Taxpayer withdrew all of the funds from the IRA (the “Withdrawal”). For the purposes of our response below, we have assumed that the amount of the Withdrawal did not exceed the amount of the Deemed Distribution.
In the Taxation Year or within 60 days after the end of that year, the Taxpayer contributed the amount of the Withdrawal to their RRSP.
This technical interpretation provides general comments about the provisions of the Act. It does not comment on the application of any provision of a foreign law, including the Code. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
In technical interpretation 2017-068230, which dealt with the same hypothetical fact scenario, we concluded that subsection 56(12) of the Act would deem the amount of the Deemed Distribution to be a payment received by the Taxpayer out of the IRA such that the amount would be included in computing the Taxpayer’s income pursuant to clause 56(1)(a)(i)(C.1) of the Act. We also concluded that, to the extent the amount of the Withdrawal did not exceed the amount of the Deemed Distribution, the amount of the Withdrawal would not be included in computing the Taxpayer’s income on the basis that such amount would not be “subject to income taxation” in the U.S. within the meaning of clause 56(1)(a)(i)(C.1).
In general terms, paragraph 60(j) allows a taxpayer to deduct in computing the taxpayer’s income for a taxation year such part of an “eligible amount” in respect of the taxpayer for the year as is designated by the taxpayer in the taxpayer’s return of income for the year, up to the amount paid by the taxpayer in the year (or within 60 days after the end of the year) as a contribution to the taxpayer’s RRSP.
Under section 60.01 of the Act, the amount of a payment received by a taxpayer in a taxation year out of or under a FRA (i.e., the IRA, in this case) is an “eligible amount” in respect of the taxpayer for the year for the purposes of paragraph 60(j) where certain conditions are met. One of the conditions is that the amount has been included in computing the taxpayer’s income for the year because of clause 56(1)(a)(i)(C.1).
Thus, in order for it to qualify as an “eligible amount” within the meaning of section 60.01, the amount of the Withdrawal must be included in the Taxpayer’s income pursuant to clause 56(1)(a)(i)(C.1). Since it is the amount of the Deemed Distribution (not the Withdrawal) that is included in the Taxpayer’s income, the amount of the Withdrawal would not satisfy the criteria for being an “eligible amount”.
Furthermore, we note that, while the deeming rule in subsection 56(12) applies for the purposes of paragraph 56(1)(a), the rule does not apply for the purposes of section 60.01. As a result, the amount of the Deemed Distribution would also not satisfy the criteria for being an “eligible amount” as it is not a “payment received” for the purpose of section 60.01.
Therefore, neither the Withdrawal nor the Deemed Distribution would support a deduction under paragraph 60(j).
We will bring this matter to the attention of the Department of Finance Canada for consideration as to whether, and to what extent, a legislative change is warranted.
We trust that these comments will be of assistance to you.
For Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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